That certainly seems to be the case for Powerhouse Energy (LSE:PHE) of late. In the last 12 months, the penny stock’s up a whopping 192%! What happened? And is this company on track to continue delivering explosive returns in the long run? Let’s take a closer look.

The patent war’s over – Powerhouse won

As a quick reminder, this small enterprise is exploring opportunities within the alternative energy market. Its technology allows it to process and convert unrecyclable waste into fuel, electricity, energy, and high-grade hydrogen, among others.

Needless to say, with the impact of climate change becoming ever more apparent, such solutions are rising in demand. And it certainly explains the high level of investor interest in this business. Even more so now that the company’s just won its legal dispute with Onunda Ltd.

Last October, Onunda filed a claim against Powerhouse Energy in the London High Courts regarding the group’s recently submitted European Patent. That’s obviously concerning, given prolonged legal battles are both distracting and expensive, especially if Powerhouse were found to be in the wrong.

Yet, despite justifiable concerns from investors, it seems management was spot on when they described the claim as “entirely without merit and vexatious”. Why? Because earlier in May this year, the matter was resolved, with Onunda barred from bringing any further challenge against Powerhouse’s patents.

With this headache out of the way, the firm’s returning all of its attention back towards its promising R&D projects. So it’s no surprise to see the penny stock surge on this news.

Time to buy?

Despite shares trading at around 2p, the firm’s market capitalisation is close to emerging out of penny stock territory. Today, it stands at roughly £80m, quickly approaching the £100m threshold of becoming a small-cap. But can this upward momentum continue? After all, it’s reached as high as 11p in the past. And a return to this level represents a potential 450% return!

Personally, I think investors ought to adopt some healthy scepticism. There’s no denying the group’s technology has a potentially highly lucrative future. In fact, the UK waste-to-energy market’s estimated to be worth over £1.7bn today, indicating that Powerhouse has barely scratched the surface of its market opportunity.

But there’s still a giant question mark as to whether management has the know-how or resources to get it there. It’s important to note that this company doesn’t even have a revenue stream yet, and it’s bleeding through a lot of cash.

As of June 2023, there’s around £4.4m of liquidity in its bank account. That’s enough to cover its short-term liabilities. But once the group starts to ramp up operations, a lot more money’s going to be needed. Given its weak financial position, that likely means shareholders will be getting diluted as the group issues new shares.

Right now, this penny looks more like a gamble than an investment. At least, that’s what I think.

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It’s common for penny stocks to see such high price volatility. However, there was a good reason this time as the company announced a proposed joint venture with Hydrogen Utopia last week. With plans to build Powerhouse Group’s first full-scale plastic-to-hydrogen facility, investor interest shot up.

The company develops technology to convert recycled plastic into clean energy. With exciting new initiatives in development, I believe the Powerhouse Group share price has the potential to rise even higher. Now, sat at 2.3p, let’s look at why I’d add this renewable energy stock to my portfolio.

Leading renewable technology

In its FY21 report, Powerhouse highlighted the appointment of CTO Paul Emmitt to the board. This decision underpins the company’s ambitious Global Technology & Innovation Centre (GTIC). Operation is set to commence in the second quarter of 2023.

The GTIC would place the firm in prime position to develop its gasification technology. It would also enable fast and effective responses to the needs of the green market. This is very valuable given countries’ increasing efforts to hit net-zero carbon targets. I think that the GTIC will become a key pillar of this renewable energy stock’s growth.

Yet it must be noted that the funding for the centre has been procured through a £10m share issue. With such a large share dilution, I’m cautious that my investment could be devalued in the near future. 

However, the company achieved significant developments in its operational health. The operating loss decreased from £16m to £2m across FY20-21. Available cash also rose to £9.6m from £3.5m. This has placed Powerhouse Group is a more stable financial position. The company is now free to push investing imperatives forward.

Pushing plastic forward

Another initiative it’s developing is the Protos Plastic Park. Operation is also set for 2023. This waste-to-hydrogen plant may be exactly what this renewable energy stock needs to skyrocket.  

The company has applied thermal conversion technology to solve two key issues. The Protos plant will offer a cheaper and more effective method of plastic recycling. It will do so while also producing clean hydrogen power. 

This dual-offering suggests that Powerhouse could become a very valuable company within the energy sector.

Having said this, Powerhouse has faced a difficult road. Changes to project management and strategy resulted from pandemic-induced disruptions. Because of this, key target dates for construction were missed. Also, lending for the plant increased from £1.15m to £1.89m in early 2022. However, the increase in available cash suggests this won’t burden the company’s financials. 

Overall, I believe it’s in an excellent position to push its initiatives forward. Operational improvements leave the company free to prioritise strategic investment. Indeed, the Protos Park and GTIC have the potential to make this renewable energy stock skyrocket if things go as planned. Because of this, I will be looking to add the shares to my portfolio.

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Recently, there has been a huge impetus on cutting carbon emissions and looking at green energy alternatives.

Should I look to get in early on this potentially lucrative space by adding cheap shares to my holdings? Let’s take a closer look.

A dirt-cheap penny stock

For a bit of context, Powerhouse designs and develops clean energy recovery technology. It enables the disposal of waste streams and re-using this waste by converting to gas to be utilised in other areas. One of its prominent products, its Distributed Modular Generation platform, allows the regeneration of plastic to power and hydrogen.

I find it rare to come across established businesses in the penny stock category that actually trade for a penny. Well, in Powerhouse’s case, that is true. As I write, the shares are trading for 1p. Such is the volatility of small-cap stocks, the shares have fallen since this time last year when they were trading for 5p. The stock market correction and macroeconomic factors won’t have helped.

The bull case

So what are the potential upsides to me buying the shares for my holdings? Well first of all, the waste-to-energy market is currently lucrative and expected to grow. It is estimated that the sector is worth over $30bn today and is set to nearly double in the next five years. Powerhouse could be ready to reap the rewards of such growth, especially with its already established current technology.

Green energy and alternatives to traditional fuels are high on the agenda of governments worldwide. Many directives to cut emissions and produce alternatives that do less harm to the environment are in place and gaining traction. Powerhouse could be primed to benefit from this action, which could boost performance and returns in the long term.

An example I found of Powerhouse’s capability is its Protos project in Cheshire, which will be set to power 250,000 homes from 2024. Powerhouse continues to develop its technology and partner up with other businesses to create similar projects.

A penny stock with risks and my verdict

Despite my bullish stance on the market as a whole, and Powerhouse’s current projects, there could be credible headwinds ahead. There are still construction hurdles to overcome to successfully build projects like Protos.

Macroeconomic headwinds such as rising inflation, rising costs of raw materials, and the supply chain crisis could derail progress. Costs could spiral and there may be delays. This could have a material impact on investor sentiment and returns.

From a risk-to-reward perspective, I would be happy to buy a small number of shares at just 1p per share. My investment strategy has always been to buy and hold for the long term and I would adopt that approach here. If Powerhouse shares fell or did not provide returns, I would not have lost much of my hard-earned cash.

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But there’s other issues that could derail corporate profits like China’s economic cooling and soaring inflation. News that US inflation hit 40-year highs last month certainly caught my attention.

Personally, I don’t plan to stop looking for penny stocks to buy. A company’s low share price doesn’t mean it’s in danger of significant profits trouble in 2022. Nor does it mean that it doesn’t have the financial strength to survive further economic volatility.

With this in mind, here are two top penny stocks I’m considering buying for 2022. I think they could help me make terrific returns beyond the next 12 months too.

A penny stock for the eco revolution

The growing importance of greener energy and waste reduction means Powerhouse Energy Group (LSE: PHE) could have a very bright future. It is a specialist in the field of creating synthetic gas from waste products like plastics. Gas which is then used to make hydrogen.

The waste-to-energy market is tipped for huge growth as concerns over the environmental impact of landfill sites increase. Analysts at Grand View Research think it’ll be worth $54.8bn by 2027, up from $33bn today.

Powerhouse is hoping its under-construction Protos project in Cheshire — which it expects will power up to a quarter of a million homes when it starts up in 2024 — will allow it to exploit this fast-growing market.

Powerhouse Energy’s share price could suffer significant weakness if delays in getting Protos up-and-running develop. This would be particularly problematic if costs spiral as a result. Still, as things stand today, I think there’s a lot to get excited about with this cheap UK share. Today, the company trades at 4p per share.

Turkish delight

I’m also considering buying DP Eurasia (LSE: DPEU) for my shares portfolio in 2022. This penny stock (which trades at 88p per share) looks particularly delicious in terms of value today. City analysts think earnings at the pizza seller will rocket 320%-plus next year. This leaves it trading on a forward price-to-earnings growth (PEG) ratio of just 0.1.

DP Eurasia is the master franchisee of the Domino’s Pizza brand in Turkey, Azerbaijan, Georgia and Russia. It thus has considerable brand power in an industry tipped for explosive growth in the years ahead. Latest financials showed system sales leapt almost 52% year-on-year during the 10 months to October.

My main concern for DP Eurasia is the growing economic instability in its key market of Turkey. Last week, ratings agency S&P slashed its outlook on the economy there due to soaring inflation. Still, I’m encouraged by the penny stocks impressive recent momentum, in spite of worsening conditions in its Turkish market.

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This UK share has developed proprietary advanced thermal conversion technology (called distributed modular generation, or DMG for short) that turns waste like plastics and rubber tyres into hydrogen. Powerhouse claims that its system is lower cost, can create less waste, and can be used in a broader range of uses than other ‘energy from waste’ technologies.

Powerhouse is setting itself up to exploit a potentially explosive market. Statista thinks the waste to energy industry will grow by almost a quarter between now and 2027 to be worth $50.1bn. But I need to remember that development of its flagship Protos plant remains at the early stages. Any issues in the construction of the site could have significant implications for future profits and sink Powerhouse’s share price.

Another penny stock for the green revolution

The escalating climate crisis also means that demand for Kingspan Group’s (LSE: KGP) construction products is booming. The business sources the majority of its revenues through the manufacture of insulation panels and boards, helping its customers improve their energy efficiency. Its other technologies also help save water and boost the amount of natural daylight coming into buildings.

Kingspan’s operations span Europe, North America, and Australasia, giving it excellent geographic diversity. Sales volumes rocketed 30% in the six months to June, while revenues leapt 36% excluding currency movements and contributions from acquisitions thanks to price inflation.

Turnover could take a hit if economic conditions worsen and the construction sector begins to struggle. But thinking about buying the stock and holding it in my portfolio for the long term, I think Kingspan is a highly attractive ESG stock. Analysts at Researchandmarkets.com think the global foam insulation market will grow at a compound annual growth rate of 4% during the next five years.

An exciting healthcare share

Investing in pharmaceutical stocks can be risky business. Drugs development is packed with hazards. Even if a treatment passes the R&D stage without costly setbacks and delays it may fail to get regulatory approval. But sometimes an attractive healthcare stock comes along that really grabs your attention. Sareum Holdings (LSE: SAR) is one that I’m consdering buying today.

This penny stock produces drugs for the treatment of cancer and autoimmune disorders. These areas alone provide plenty of growth opportunity for Sareum. Indeed, positive patent and testing news on its oncology-related products have helped drive the share price to record highs recently. The company’s decision to make drugs that battle Covid-19 symptoms has also boosted its profits outlook. Its SDC-1801 treatment has proved to be more effective in combating symptoms of coronavirus than other anti-inflammatory steroids.

Sareum is a company that seems to have the wind in its sails right now. Though its products are still yet to hit the shelves, this is a share I think could explode in value during the next decade.

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Why is the share price tumbling?

I’ve looked at this business before. But as a quick reminder, Powerhouse Energy is a young waste-management enterprise. The firm developed a proprietary chemical recycling process called DMG. This technology converts end-of-life plastics into a hydrogen-rich synthetic gas that can replenish fuel cells. It not only helps tackle pollution but also provides an alternative source of low-cost energy.

Given that the waste-to-energy market is expected to reach $55bn by 2027, I can understand why some investors were quite excited by this company, leading to the explosive PHE share price growth last year. However, while the technology might be promising, the business remains unproven – something that many investors failed to recognise, leading to a runaway valuation.

Powerhouse Energy has begun generating revenue. But its flagship plant, Protos, is still under construction, and will likely remain that way for several years. And it seems shareholder patience simply isn’t that long, leading to a steady decline in the PHE share price.

An explosive growth opportunity?

Despite the high expectations of investors, there are some reasons to be excited. Once Protos is complete, it will be able to convert up to 4.9 million tonnes of plastic each year into 140 Megawatts of electricity. That’s enough to power 250,000 homes. While the firm will be exposed to a single-asset risk, revenue growth will likely be quite explosive and can be used to diversify its portfolio in the future.

Looking at the latest interim results, Powerhouse Energy has around £10.9m of cash on its books, which is more than enough to cover its short-term obligations. In the meantime, it has begun generating a small-but-growing revenue stream of £373,306 by providing engineering services.

Overall, it seems to me that Powerhouse Energy has enough capital to keep itself afloat for now. And if Protos is completed with no unexpected problems or delays, the PHE share price may be set to surge over the long term.

The bottom line

As exciting as the future growth prospects may be, there remain many unknowns. Even when Protos comes on-line, there’s currently limited information to discern how profitable the operation will be. That makes it quite tricky to value.

Personally, I think it’s too soon to add this business to my portfolio. Once more financial and operational data becomes available, I’ll take another look.

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Yet its share price has continued to trade basically sideways for the past six months. An update on testing in the second half could light a fire under the pharma play’s share price again.

Of course, buying drugs developers can be high risk. There’s no guarantee trials will come back positive, in this case neither for the testing of said vaccine later in 2021, nor for its other products used to treat cancer and infectious diseases.

But at the moment, news flow surrounding its Covid-19 battler for one continues moving in the right direction. South Africa signed off for Phase 1 clinical trials to begin late last month.

Packed with potential

I think Scancell could be considered to be a very speculative buy. But if it gets things right, the rewards for investors could be considerable. As for Covid-19, analysts at McKinsey & Company predict the pandemic will drag on for the next few years, at least. And, pleasingly for the likes of Scancell, they anticipate “it is likely that some measures such as booster vaccines are likely to be required indefinitely.”

Scancell’s work in the fast-growing fields of oncology and infectious diseases also offers plenty to be encouraged by. Although it’s worth noting City brokers don’t expect the penny stock to turn a profit for the next few years at least. Drugs R&D is expensive business, and Scancell may well be forced to tap shareholders for cash before too long.

Another exciting penny stock

Powerhouse Energy Group’s (LSE: PHG) another penny stock packed with potential. The escalating climate crisis means legislators are accelerating plans to further their green agendas. And this plays into the hands of this UK energy share.

Powerhouse has developed proprietary technology than turns discarded plastic, tyres and other waste items into clean energy, in this case a hydrogen-rich gas.

Hydrogen is one area of energy in which lawmakers are stepping up investment. In the UK, for instance, the government plans to develop 5 gigawatts of low-carbon hydrogen production capacity by 2030. Analysts at Bank of America think hydrogen will take 25% of global oil demand by 2050.

This doesn’t mean Powerhouse Energy is a slam dunk for those seeking to ride the green revolution, of course. Okay, the penny stock generated its first-ever revenues in 2020, thanks to initial engineering work on the Protos energy recovery facility in Cheshire.

But this line of work is naturally complex and expensive. So any problems with getting its technologies up and running (it’s hoped Protos will be working by 2022) could hammer its sales expectations and force it to ask investors for cash.

Still, like Scancell, I think this penny stock’s still worth serious attention today.

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With the penny stock losing strength, is now a time to buy it for my portfolio?

Powerhouse Energy and energy shifts

Powerhouse Energy has a proprietary technology that allows it to extract gas from used plastics. That gas contains hydrogen, which means that it can be used to fuel hydrogen cells.

Based on that, the investment case for the company would seem to tick a lot of boxes. Plastic waste has been a mounting concern – and Powerhouse seems to offer a partial solution for that. Hydrogen is seen by many commentators as a replacement for fossil fuels – and Powerhouse can help with that too.

Not only does the company seem to respond to current trends, it is moving forward commercially too. The first site using Powerhouse’s technology is expected to be operational in Ellesmere Port next year. A second plant is now planned, in West Dunbartonshire.

The company has also had some success licensing its technology abroad. Last month, for example, the company announced heads of terms with a view to licensing the technology in Hungary and Greece. That deal alone could net Powerhouse €250,000.

With positive developments like this, why has the Powerhouse Energy share price been falling?

The falling Powerhouse share price

First, it’s worth noting that Powerhouse isn’t a new company. Its listing dates back over two decades. While it’s a penny stock now, it once hit a valuation more than 1,000 times higher than today. By this point, many investors have long since lost confidence in the stock, no matter how promising the latest business developments may seem. That is understandable, but it isn’t necessarily rational.

Another concern when I look at the Powerhouse Energy share price is the company’s weak financial performance. Take its most recent annual report, covering 2019, as an example. The company – as has been the case for many years – didn’t report any revenue at all. It did sign a contract which ought to generate revenue in the future. But not a single penny came through the door in 2019. Meanwhile, the company lost £1.5m. The year before it also didn’t generate any revenue, and lost £2.3m.

For a company spending money in research and development before launching a product widely that is understandable. But the Powerhouse Energy share price even at its current low level means the company is capitalised at more than £200m. I think to justify such a valuation, a lot of things need to go very well for the company in future. Its track record to date gives me limited basis for confidence that that will happen.

I’m not buying

Even after its recent fall, I won’t buy Powerhouse Energy for my portfolio. As well as valuation concerns, risks include shareholder dilution if the company needs to raise funds, any teething problems at its first site incurring costs, and shifting environmental regulations affecting the attractiveness of its technology.

I think its technology and growing commercial plans mean business prospects are improving. But its valuation seems rich to me for such an unproven business model. 

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The future potential of Powerhouse’s (PHE) share price

Powerhouse is a waste-management and alternative energy company. Using its proprietary DMG technology, the group can convert end-of-life plastics into a usable synthetic hydrogen-rich gas. This product can ultimately be used as a fuel source for hydrogen cells. And given that the UK and other western nations are adopting hydrogen power in their pursuit of carbon neutrality by 2050, the demand for the technology is rising. That’s fantastic news for the PHE share price.

I’ve actually explored this company before. And since then, the management team has made some notable progress. Firstly, it has successfully issued a new exclusive licensing agreement with Hydrogen Utopia International (HUI). Under this contract, HUI can deploy Powerhouse’s DMG technology across Greece and Hungary in exchange for an initial payment of €250,000 (€25,000 of which has already been received), followed by a continued licensing fee for each plant that becomes operational.

What’s more, the firm’s existing partner, Peel Group, is planning to develop a second DMG site within the UK of a similar scale to the Protos project. That means roughly another 250,000 homes could become powered by this plant, bringing the total to over 500,000 in the UK alone. Meanwhile, Powerhouse has also placed the order for a critical alloy needed to forge the DMG Thermal Conversion Chamber for the first site. While the completion of this component won’t happen until later in the year, the Protos plant remains on track to be operational by Q1 2022.

Personally, I think this is all very encouraging progress. So why has the PHE share price been falling?

The risks that lie ahead

While the DMG technology might be proven to work, its financial viability remains to be adequately tested. Powerhouse has only recently started generating revenue. But for the most part, the top-line income will remain largely restricted until the Protos plant comes on-line next year (assuming there are no delays). What’s more, the time horizon as to when this business may eventually become profitable remains unknown.

It does have some cash on its balance sheet. But due to the high initial costs of deploying its technology, the firm’s accounts payable figure has been building up. As of the latest figures published in June 2020, Powerhouse has nearly £1m in short-term obligations versus only £0.25m in cash & equivalents. Consequently, it remains dependent on external funding that may not always be available.

This liquidity risk alone may be enough to explain the weakening PHE share price. However, even after the recent decline, the valuation remains exceptionally high. Revenue for the first six months of 2020 came in at £0.1m versus today’s market capitalisation of around £220m. To me, that looks like the PHE share price may still be too high, given the underlying fundamentals. Like all valuations driven by expectations, the slightest sign of trouble could send the stock plummeting. Therefore, Powerhouse is staying on my watch list.

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What’s going on? And is this a buying opportunity for my portfolio? Let’s take a look.

A growing alternative energy business

I’ve previously discussed Powerhouse Energy. But as a reminder, the business is an energy producer that developed a proprietary technology to convert waste plastics into a usable synthetic gas called EcoSynthesis. This has the same desirable traits as natural gas and can be used in gas turbines that power the vast majority of UK homes.

But it also contains a large quantity of hydrogen that can be extracted to make fuel cells at a relatively low cost. Given that hydrogen-powered technology is a key aspect of the UK government’s plan to become carbon-neutral by 2050, there could be massive room for growth of PHE’s share price over the long term. So why has it been falling?

What’s happening to the PHE share price?

The market, in general, has seen a pull-back over the past few weeks after concerns surrounding rising inflation and interest rates. Growth stocks like Powerhouse Energy have particularly experienced large drops in share prices due to their already substantial valuations.

Beyond macroeconomic factors, the fall in the PHE share price can also be attributed to a dilution effect. Over the past three months, approximately 15m new shares have been issued to raise additional capital. Why? Because while the company has the technology to turn plastic into power, it has yet to acquire the facilities to do so.

Powerhouse began construction of its first energy plant last year. Once complete, it will have the capacity to power more than 250,000 UK homes. However, a project of this scale will likely take several years to become fully operational. And the management team has not given any indication of when that might happen.

In other words, the business will not be generating any significant amount of revenue for the next few years. And therefore, will have to continue raising capital through additional equity issues or debt to cover expenses. This means more dilution to the PHE share price is likely to occur in the future. At least, that’s what I think.

The bottom line

The global waste-to-energy market is expected to reach $55bn by 2027. That’s almost 80% larger than it is today. Needless to say, that offers substantial room for Powerhouse Energy to grow.

The firm needs to successfully complete the construction of its energy plant, meet performance expectations, and not run into any major problems along the way. If it can do that, then I believe the PHE share price can climb even higher in the future. But that is quite a big ‘if.

Currently, there are simply too many unknowns about the business and the effectiveness of its technology. Therefore I’m still not adding the stock to my portfolio, even at the currently reduced share price.

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